Mar

21

Mr Covel needs no introduction to DailySpec readers — he's remarked at length about Chair on his site, and vice versa. A few asides: GM Davies (!) is quoted at length on pg 99 [with attribution to DailySpec]… On pg 102 there's a discussion of quasi-Turtle Lucy Wyatt, who years later found her way to Chair's trading room, and shared some colorful stories about the proclivities of the trend-following greats… The Turtle trading "philosophy" and rules are discussed at length [as they are on the web also]; hint: buy twenty-day highs…

A smattering of highlights (with minor elisions), to give the flavor:

p 17/ Dennis told Willis, "If you're buying wheat and it's strong and the beans are two lower and the wheat is five higher, why don't you sell the soybeans instead of selling the wheat you bought?" It was a very sophisticated insight. In fact, buying "strength" and selling "weakness" short still befuddles investors.

p 18/ Dennis's attributing his height and weight as the reason he was successful is not the full story. There was more to becoming a millionaire by 25 than being "six foot something" and three hundred pounds plus. Even with excess weight, his peers described him as having cat-quick reflexes on the trading floor.

p 27/ Dennis knew the Turtles were "dumb stumps" and that the only reason they bought into everything was because he had made $200m. If he said "On Monday, you will buy the S&P when it's up exactly 35 ticks no matter what," all the Turtles would have gone over a cliff to follow orders. One Turtle said that when a guy has made $200m and he says "You can walk on water," people are going to say "Okay, I can walk on water."

p 45/ To those who saw them up close, Dennis had the capacity to make an observation in an instant that would take someone else weeks of painstaking math to figure out. Even Eckhardt marveled at Dennis's knack to intuitively see "it."

p 48/ One Turtle gushed in awe that Dennis still had the "balls" to execute that trade "when they were dumb, deaf and broke": "They were going the wrong way and for Dennis to just totally cover and totally reverse was amazing."

p 102/ All one Turtle could remember about Lucy Wyatt was that she was always doing her nails. Mike Cavalo said that Wyatt had been Eckhardt's girlfriend.

p 102/ Everyone knew Mondale was Dennis's guy. Dennis started going around the table asking everyone who he was voting for. One by one they all said "Mondale." They were his guests, and he was one of the richest guys around. However, when it was Gordon's turn he said "Gary Hart." Gordon knew he had just upset the trading king of Chicago.

p 126/ Keefer, who thought Dennis deserved a Nobel Prize for his real-world work in harnessing volatility in his trading models, lamented the allocations aspect of the program: "You've got somebody that's got an awesome trading system and he's following really rigidly good protocols about trend trading, and then he just literally blows it up on asset allocation."

p 129/ It was over. Dennis sent a fax telling the Turtles that the program had been scuttled. Dennis, who was managing money for clients, too, had two public funds with Michael Milken's Drexel Burnham Lambert. They closed down with big losses.

p 130/ Dennis himself simply declared he was retiring. He announced he would move full time into political causes. He wanted to take the wind out of what he thought were efforts to make "liberal" a dirty word.

p 131/ Lawsuits soon followed as former clients in the Drexel funds argued that Dennis had deviated from his own rules. Eventually, US District Judge Milton Pollack agreed to a settlement in which nearly 6,000 investors shared $2.5m and got half of Dennis's trading profits over the next three years. Under the settlement, Dennis and his firms did not admit any wrongdoing.

p 133/ In the book "Market Wizards," author Jack Schwager softened the blow to Dennis's tough times by entitling his chapter "A Legend Retires." Schwager's Dennis chapter became a cult classic.

p 150/ Dennis staged another remarkable comeback. It would take him through most of the 1990s. Many investors were gun-shy about another Dennis comeback. In an effort to allay client fears, he assured everyone that his infamous discretion, his inability to not personally interfere with his own rules, had been eliminated. He said the computer was his new friend.

p 151/ In some ways, Dennis was a technophobe in the middle of the Internet revolution. He always said he could not program.

p 151/ Within a few years, Dennis was out of the game again. On September 29, 2000, Dennis Trading Group ceased trading and liquidated customer accounts. Burt Kozloff, an investor in Dennis's current fund, laid out the painful truth: "Dennis Trading Group was -50% down in June."

p 152/ While it was no solace for Richard Dennis, the moment when clients pulled funds from him in the fall of 2000 was a bottom for trend-following traders. Dennis's clients had panicked at the bottom and paid dearly.

Michael Covel clarifies:

I did not have the opportunity to speak with Lucy Wyatt for my book, but I have talked with her extensively since its release. "Quasi" seems an incorrect description. She was a Turtle.

Dean Parisian recounts:

I was a salesman at Drexel Burnham Lambert in the 1980s and had clients in those RJD funds. The prospectuses put together for the RJD partnerships are to this day, the absolute finest, nicest, best-crafted marketing pieces produced. If ever there was a glossy, colorful marketing brochure this was it! One thing I will take with me to my grave stands out. In one of the calls that Richard Dennis gave to the Drexel brokers as to why his funds were being hammered and shuttered, he said, "the markets were behaving irrationally." Memory tells me they were designed to liquidate at a 50% drawdown and it wasn't more than a few weeks later that the markets he traded the funds in had reversed and skyrocketed upward. Only the lawyers made out big but it was the most equitable general partner / limited partner arrangement we had ever seen. Just another reminder to any brokers pitching partnerships to never forget the old saying, "on day one of a partnership the generals have all the experience and limiteds have all the money, on day two the generals have all the money and the limiteds are left with the experience."

Jim Sogi offers:

The Complete Turtle Trader by Michael W.Covel is an interesting tale of volatility in the trading and careers of Richard Dennis and his Turtle traders in the thin style of popular financial journalism. Vic and Laurel, Covel and the Turtle traders have had disagreements over the issue of trend following, however, I believe that there is more to the Turtle and Eckhart/Dennis systems than Covel discloses. He seems to have oversimplified the Turtle systems down to the two simple trendfollowing systems S1 and S2, systems that have been disclosed and sold years ago.

I discount those two specific breakout systems — they have not worked in the recent past on equity indices. See Linda Raschke's Turtle Soup pattern. Whether they worked in the mid 1980s I have not tested. Covel's failure to note the systems' failure in equity indices in the recent past and the implication that these systems might still be effective is very unfortunate for poor readers who might be mislead to lose more than they have any right to as a result.

There are more similarities between the Eckhardt/Dennis systems and Vic and Laurel's ideas than many who follow this dispute seem to understand. The similarities of Richard's and Vic's careers are more notable than their differences. Both came from modest backgrounds. Both undertook to give back to the community and to other traders. Both saw huge successes and notable drawdowns. I am struck by the launch to success enjoyed by those mentored by both Richard and Vic.

Richard Dennis used the scientific method, using empirical data and tests of hypothesis with computer models to create trading systems. Reading between the lines, it is apparent that the remaining successful Turtles use other systems and appropriate testing to create trades. Covel misses the significance of this most important point. The Turtles' money management alone might have proven a key element. Unless a system is profitable, money management merely postpones the eventual ruin. However the statistical analysis of money management is a necessary part of proper trading as our friend Dr. McDonnell shows in his excellent book.

Steve Leslie writes:

This encompasses so many things that have been discussed on this site for the years that I have been visiting it. My top ten list of what I learned from Mike Covel's book:

10) Those who are willing can be taught almost anything.9) Great people want to help others achieve great success.8) Success in business requires tremendous concentration. Outside distractions must be avoided.7) Sometimes it is best to leave politics to politicians.6) Everyone fails at some point in his life. The true winners rebuild after their failures.5) To put on a trade when everything is going against you requires character and commitment.4) Rules are rules. Stick to them.3) Adapt with the times. Be willing to be malleable.2) Always leave yourself outs. Never commit everything to one position or to one person.

And the number one lesson:

1) The market is bigger, stronger and badder than you. Always respect it for the beast it is.